South Africa has some interesting new real estate legislation that is destined to make an impact on how investors and property owners operate within the sector.

The City of Cape Town recently promulgated a by-law tailored to regulate the issue of dilapidated and often abandoned buildings that may pose health and safety risks to the public in general.

The by-law prescribes the regular inspection of buildings, the serving of notices and warnings on landowners requesting, amongst other things, the repair or demolition of the dilapidated structure. Notably, the by-law authorises the local authority to take such steps to repair or demolish these structures at the owner’s expense.

The by-law is a welcome measure as far as urban regeneration is concerned and other provinces may benefit from enacting similar laws.

Rental Housing Bill

Another important piece of legislation in terms of real estate is the Rental Housing Bill, which proposes to regulate the relationship between landlords, certain historically disadvantaged and/ or indigent tenants and the government.

In particular, Chapter 4 of the bill establishes Rental Housing Tribunals, which are responsible for resolving disputes between landlords and tenants. The tribunals will have the jurisdiction to determine issues relating to overcrowding; unacceptable living conditions; lack of maintenance and exploitive rentals.

This bill, if enacted, may have far-reaching consequences for landlords and tenants alike.

Novel property investment

Pretorius says that in terms of developments in the real estate sector, the Real Estate Investment Trust (REITS) is a novel property investment structure, which makes investment in income-producing real estate more accessible to a more diversified range of investors, including institutional and retail investors.

According to Investopedia, the definition of REIT is, “A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages.”

This structure has become increasingly popular in foreign countries and will be a welcome addition to the South African property investment milieu.

In terms of the future of real estate in South Africa, I believe that in the future, the residential long-term lease will become more popular as an alternative to land ownership and will offer an alternative to government in the provision of housing to persons falling in the lower income bracket.

* This report was prepared by Attie Pretorius, Cliffe Dekker Hofmeyr national real estate practice director and head

Those who have kept track of the shifts in economic power and, therefore, in the growth or decline of property values have for the last five years or more reported a steady increase in capital flows, including property investment, to the Far East, the main recipients at the moment being China, India, Singapore, Hong Kong, Taiwan and Malaysia. Nevertheless, says Lanice Steward, MD of the Cape Peninsula estate agency Anne Porter Knight Frank, the latest Knight Frank/Citibank Wealth Report makes it clear that they see Africa and other emerging economies as places where property investors should now be looking for real growth in the next decade.

What are the views or data on which Steward bases this statement?

“The International Monetary Fund,” said Steward, “predicts that the emerging economies will expand by 5,4% this year and 5,9% in 2013. This significantly outpaces the GDP growth of 1,2% this year and 1,9% forecast for the advanced economies. Citibank’s Chief Economist Willem Buiter has, in fact, predicted that the North American and Western European share of global GDP will fall from its 2010 level of 41% to just 18% by 2050. He also predicts that China will overtake the US as the world’s economy by 2020 and that by that 2050 India will be in the top spot.”

Other fast growers, said Buiter, will be Bangladesh, Indonesia, Iraq, Mongolia, Nigeria, The Philippines, Sri Lanka and Vietnam – in most cases the chief reason for this being that they have exportable natural resources.

Where then does Africa fit into this global picture?

It is interesting to note, said Steward, that just on 80% of the 6,000 high net worth individuals who participated in the Knight Frank survey are either satisfied with or optimistic about the future wealth creation prospects in Africa and although 75% listed local political instability as a potential worry, a high figure, 82%, rated global economic problems as just as threatening.

“To the surprise of many,” said Steward, “residential property values in Africa on average rose by 8% in 2011. Coming off very low initial bases, African property has proved to be a star performer when many Asian countries after phenomenal growth dropped back in 2011. It is for this reason that property companies like Knight Frank are, often with the help ourselves, expanding their footprints into Africa at a fairly rapid rate.”

Recent changes in the taxes applied to trusts now make them an expensive vehicle in which to hold property, says Lanice Steward, managing director of the Cape Peninsula estate agency, Anne Porter Knight Frank.

Since 1st March this year, says Steward, the capital gains tax on assets sold by a trust have been raised from 50 to 66,6% of the gain – and this gain is then also taxed at the flat rate of 40% applicable to all trusts.

“It is now clear,” said Steward, “that the government has set its mind against trusts being used for property owning purposes. However, it is worth noting that if the gain is distributed among the beneficiaries they will be taxed at the lower rates applied to individual taxpayers.”

In the circumstances, says Steward, it is important for those setting up trusts to be absolutely clear as to what their intentions are.

“Trusts can still be a good way to protect the assets of a minor before he or she is in a position to inherit but in general lower individual taxes make it preferable now to hold the property in an individual’s name.”

Landlords in South Africa, says Tony Clarke, managing director of Rawson Properties, have in recent years sometimes had the impression that the courts, in their endeavour to comply with the constitutional right of citizens to have “access to adequate housing” have been overly sympathetic to tenants, even when they behaved in such a way as to break their lease agreements.

However, said Clarke, a recent High Court case has, to an extent, shown that landlords still “have teeth” if and when the tenant is clearly in breach of contract.

In the case to which Clarke was referring (Jacobs and Another vs Upward Spiral, a property owning close corporation), Upward Spiral applied to cancel the Jacobs lease on the grounds that they had damaged the bathroom in the premises of another occupant (who had the landlord’s permission to live there) and had made no effort to repair it, despite requests to do so.

Jacobs defended the cancellation of the lease on the grounds that, prior to their damaging the bathroom, it had already been dysfunctional and emitted foul odours. They had requested Upward Spiral to remove or renovate it in toto – but they did not pursue the matter.

When the default judgement with costs was given against the tenants by the magistrate’s court, they applied for a rescinding order – this, too, was not granted by the magistrate.

The Jacobs then appealed to the High Court – but they were again unsuccessful, the High Court ruling that the tenants had not treated the damaged bathroom issue with the urgency it deserved, had been tardy in contacting their attorneys and had not taken the lease documentation seriously.

“There has recently been a big increase in cases against tenants,” said Clarke. “A recent TPN report has shown that only 68% are now paying on time and instances of damage to properties are rising. This case will encourage landlords because it reinforces the sanctity of contract, it recognises that tenants have a duty to maintain their premises properly and it gives a clear warning to tenants that to sit back and ignore letters from the landlord will result in their being deemed in breach of contract – even if they can later offer supposedly valid reasons for their slackness.”

This case was reported in the STBB newsletter which, says Clarke, has given it widespread coverage.

Throughout the South African property development and construction sectors, says Paul Henry, Managing Director of Rawson Developers, one of the most active of the Cape residential property development companies, those involved are having to introduce exceptionally tough price cuts which may – or may not – keep them in business for the coming year.

“Almost all building materials other than cement and cement-based products,” says Henry, “have come down substantially. Three large aluminum suppliers have closed their doors in the last half year and the slow recovery has led to a price war.

“While we, as developers, obviously welcome the ongoing drops in prices, some of which in the boom era were far too high,” says Henry, “it really does concern us that the future of many merchants and suppliers, many of whom have given good service over the years, is now threatened. Several we know of are working simply to promote turnover and move stock, not to make any sort of profit. This kind of situation can only last for a relatively short time.”

Many of the professionals serving the construction sector, some of whom four or five years ago had more work than they could really cope with, are now, says Henry, without commissions and facing a future in which, despite being prepared to cut their fees drastically, they simply cannot see any significant new commissions on the horizon.

Developers of multi-unit sectional title schemes like Rawson Developers, says Henry, have learned over the last few years to be very innovative – probably more so than in any stage in the last decade.

“What we have learned about cutting costs,” says Henry, “is of course very valuable and experience has shown that redesigning units to make them even smaller can be done without their losing their appeal. We have also learned to source less expensive substitute materials, some of which are very attractive. In addition, certain tasks have been deskilled so as to make them less expensive. However it has to be recognized by the government, which theoretically believes in homeownership, that the 70% decline in

home unit deliveries is not at all healthy for the country. Those of us in touch with the less affluent areas in and around the big cities know that urban and township overcrowding of residential units has now become a national problem – which only increased homeownership can solve.”

“Market lethargy caused by job losses, low salaries and a lack of bond finance has,” said Henry, “slowed home delivery and home buying down to such an extent that the unemployment rate in this sector is now very serious. Rawson Developers recently placed an advertisement for a quantity surveyor, and received more than 150 applications from qualified people.

“Never in my experience has the situation been as bad as this.”

The news about CGT in the recent Budget has brought, in some respects, further relief for sellers of primary residences but the general increase of the CGT rates will have a definite and immediate effect on the pricing of property.   This is according to Herschel Jawitz, Chief Executive of Jawitz Properties.

Going forward, for primary residences sold from 1 March 2012 for a value of R2 million and over, the first R2 million will be exempt from CGT.  This is an increase of R500,000 over the previous R1,5 million dispensation.

The bad news came in the form of a substantial increase in the inclusion rate of the taxable net profit an individual realises when they sell.  Formerly 25%, the rate is now 33.3%.   “This will translate into an average rate of CGT an individual pays of 13,3%, which is substantially up from the previous average of 10%,” Jawitz says.

The increase from a 50% inclusion rate to 66,6% will apply when a company or close corporation sells a property ,which translates into an average of 18,6%, up from the previous 14% and trusts’ rates have increased from 20% to 26,7%.

“The increase in the inclusion rate when an entity sells a property is a further indication of SARS’s eagerness to encourage investors to take transfer of residences into their own names, as entities are to be used mainly for trading purposes.”

CGT is not a flat rate charged by SARS.  Rather, it’s a calculation based on the net profit realised, which is then added to an individual’s income and taxed according to the tax tables.  Furthermore, it’s a rollover tax, which means that, even though the tax is triggered on the date the agreement is signed, it only becomes payable when the income tax return is submitted at the end of the financial year during which the property was sold.

According to Jawitz, the impact of the increase from 50% to 66% is substantial.  “If a home is owned in a legal entity then the actual tax payable to the receiver will be as much as a third higher than last year taking into account that the R2 million exemption does not apply.”

However, a number of deductions can be made against the gross profit, Jawitz says.  These include any renovations that were done and which will qualify as an improvement to the property; estate agents’ commissions (and the VAT); attorneys’ fees (and the VAT); and other fees for other professionals such as architects, draughtsmen, even beetle inspectors.  However, costs for routine maintenance, such as painting the property, cannot be deducted.

“Nevertheless, the increase in the rate of CGT on properties owned in a legal entity continues to make it financially prohibitive to own a property in this way. Owners need to make sure that they carefully consider the merits of owning a property in a legal entity.”

The tax amnesty period for properties to be transferred out of entities and into individual ownership is still available until the 31^st of December this year subject to certain requirements being fulfilled. “Owners of properties in trusts, companies and close corporations would be well advised to consider taking advantage of the amnesty benefit before it expires,” Jawitz concludes.

Property investors with access to finance will find many good opportunities to build their rental property portfolio in the current market.

However, while there are value-for-money properties to be bought, there are still a few guidelines investors will need to follow to ensure that they get the most out of their investment, says Adrian Goslett, CEO of RE/MAX of Southern Africa.

Don’t be too hasty or forget the research 

According to Goslett, regardless of whether buying a property as a primary residence or as a rental investment, buyers need to do the necessary homework and start the exercise with the goal of gaining as much information as they can get their hands on.

With a vast mass of information at their fingertips, buyers can complete a large majority of their groundwork while sitting behind their computer. Internet property search portals are a great way to compare pricing and what different areas offer.

Do choose the type of rental market that suits you

Once the research has been concluded, an investor should consider the type of rental market they want to get into, as this will have a large impact on the return of investment.

This decision will mostly be based on the location of the rental unit. The off-campus student accommodations are always in high demand and with the constant influx of students each year, it is likely that finding a tenant will be fairly easy.

Units within walking distance of the campus that are in a secure complex are always popular among students and parents alike, and have shown consistent healthy return on investment over the years.

Another type of market is rental units in proximity to financial business hubs. These also generate a good return of investment with the high demand for properties within an easy distance for those who work in the business hub.

Given that these units generally cater to business executives, a higher rental price can sometimes be asked.

Don’t charge over-priced rentals 

Determining the rental price that can be charged for any rental property will be based on the area and average rental for units with similar offerings.

Over-priced rentals will make the competition look better and make it a lot more difficult to find a tenant. A comparative analysis of the rental market in the particular area the rental unit is situated in, will give a good indication whether the rental amount is fair and market related.

This comparison will also give the investor an idea of what they can expect to earn and whether the investment is worth it.

Do consider other costs

Buying a rental property won’t just cost the investor the bond repayment, there are also levies, transfer costs, legal costs and of course the cost of maintaining the property.

Unless covered by insurance, any defect that the property has will be for the owner’s pocket and even if nothing goes wrong, the property will still need to be painted and kept in good working order.

It is vital for landlords to have an emergency fund that they can use for large unexpected expenses that may occur.

Another cost for investors to weigh-up is their time and effort. If they are going to manage the property themselves then it will take time, alternatively if they decide to employ a management agent, it will be an additional expense.

Don’t forget to read the fine print

Make sure that the legalities of all agreements with tenants are correct.

Goslett says that it is important for landlords to have a lawyer or property professional check their lease agreement to make sure that they are within the requirements of the law.

It is also advisable for landlords to research and know the law and what it prescribes. There is no point in making a return on the rental investment, only to use the money to pay for legal disputes with tenants.

Do consider the following

- Apply risk management principles and have an agreement with regards to what is acceptable tenant behaviour, sign a legally valid lease agreement, secure a deposit and agree on breakage costs.

- Inspect the property on a regular basis at a time that suits the tenant. The timeous collection of rentals, levies, rates and taxes each month is also important.

- Consider appointing a professional rental management agent, which can be a cost-effective and efficient solution to managing a rental property. For a percentage of the rental income, the agent will screen potential tenants and conduct full credit checks as well as tenant history and they will collect the rent each month.

“If the guidelines to buying a rental property are adhered to, a rental property investment can be an exciting way to realise returns on your property investments, but be warned it is not everyone’s cup of tea,” says Goslett.

One of the many reasons why direct property investment consistently produces superior returns is the fact that it allows an investor to retain firm control of his or her investments.

This is the view of Dr Koos du Toit, CEO of P3 Investment Group who says many investors, confused by the wide range of investment vehicles and mechanisms, which are often shrouded by foreign-sounding ‘financial’ jargon, simply hand over their hard-earned money to an unknown third party – be it a financial adviser, a banker or an asset manager, without really understanding the investment option they implicitly select.

In doing so, he says these investors relinquish responsibility for their money and their financial future. “They have absolutely no control over their investment and can do nothing to influence the performance of their investment, except to hope that this third party will deliver on the promises made.”

On the other hand professional property investors, explains du Toit, have empowered themselves with knowledge of how property investment works.

Given the simplicity of the property investment model, he says they are able to do their own due diligence on each investment opportunity, to ensure they invest their money in a good property in a good area with solid rental demand – where it will earn not only ongoing, compounded capital growth, but will also produce an ongoing, inflation-linked passive monthly income for life.

“They know exactly where their money is at all times, in a bricks-and-mortar property they can see and touch.”

He says an investor who directly owns income-producing properties is not at the mercy of volatile market sentiments or the performance of asset managers, but can actively manage his or her portfolio: taking advantage of exceptional buying opportunities, adding additional income streams, renovating or refurbishing properties to increase income potential, negotiating with tenants to avoid a vacancy or increase the return, and even selling non-performing assets if necessary.

For this reason, he adds you will seldom hear professional property investors lament the poor performance of their salaried asset manager or bemoan the fact that the economy has decimated their portfolios or that events on the other side of the globe have vanquished their carefully crafted long-term strategies.

On the contrary, du Toit says property investors who take a professional approach to their property investment business never relinquish control of their hard-earned money or their future success to any third party.

“They, and they alone, assume responsibility for their success and their wealth, and as professionals, they are competent and confident in doing so.”

This confidence is derived from following proven step-by-step systems, including using custom-made software, and implementing tried-and-tested risk management strategies such as appointing a reputable rental management agent and taking out rental insurance, explains Dr du Toit.

“In this way, professional property investors make solid investment decisions, manage their risk prudently and reap the benefits of an investment strategy that has proven to be infallible when applied correctly.”

In addition, while professional property investors never relinquish control over their money and their investments, they certainly do not have to do everything themselves.

They appoint experts such as reputable rental management agents and trust specialists to take care of the details, says du Toit, and as such, professional property investors do not manage properties or tenants.

They manage growing property portfolios and they manage the experts they have appointed to take care of the details, he says.

He says they have mastered the fine art of delegating authority without abdicating responsibility -they are concerned with identifying lucrative areas, scrutinising individual deals, negotiating, and turning their vision of passive income and wealth into reality.

Professional property investors take control of their own destiny, their own success and their own investments, with the assistance of professional organisations, which streamlines and simplifies their lives, says du Toit.

“At the end of the day, professional property investors – and they alone – reap the benefits of taking full responsibility for their own wealth creation.”

It is, says Jason Lee, national head of Rawson Commercial and author of two top selling books on property investment, “Making money out of property in South Africa” and “Fast Forward Your Retirement Through Property”, revealing how many of the world’s wealthiest people have a high percentage of their assets in property.

Lee has just read the autobiography of the Englishman, Lord Alan Sugar, the founder of Amstrad, today one of the world’s leading electronic companies.  In his earlier years Sugar gave £250 000 to a “financial expert” for placing in a Japanese equity fund – and lost it all in a remarkably short space of time.

Thereafter he made it a policy to invest either in his own company or in property – and for a start wherever possible he bought the factories and offices in which Amstrad operated.

“His policy,” said Lee, “was to invest in attractive premises in good locations and with leases of ten years or more.  Knowing that there would almost always be a capital gain benefit, he was usually content if the initial return matched what the same investment could achieve at the banks on a fixed deposit – and he has testified that this simple philosophy has paid off handsomely.  It has, he says, been one of the prime reasons why he is today one of the wealthiest people in Britain.”

Lee said that Rawson Commercial has many clients following the same investment strategy and, he added, right now they are in a particularly active buying phase.

The reasons for this, he says, will be clear to anyone who has kept an eye on property trends over the last ten years.

“Commercial property in SA today has on average held its value better than its residential counterparts.  Commercial property owners who have invested over medium to long periods typically enjoy double digit yields on their investments as a result of fixed rental escalations.  Despite the current economic global problems, the majority of South African commercial rentals are still rising annually by 8 to 10%.  By way of contrast, on the money market the average return is seldom more than 6% – if that.

Rawson Commercial has since its foundation in August last year had a very fast growth rate.  Today it has 16 franchises in three provinces and employs 27 brokers.

Lee said that their declared aim is by the end of this year to have the largest commercial footprint in South Africa.

“It is,” said Lee, “impressive the way some of these new franchises have already grown.  This is testament to the strength of our franchise system as well as the training and support structures on offer.”

As a landlord, one of the worst situations to find oneself in is dealing with a problematic tenant who does not comply with the terms in the signed lease agreement.

There are many reasons for wanting to get rid of tenants, such as causing major damage to the property, staying on the property after the lease has expired and continuously breaking rules of the contract. But the most common reason for wanting to evict a tenant is due to late or no payment of rent money.

Thereare a number of laws within South Africa that govern rental agreements, including the Rental Housing Act (Act 50 of 1999), Law of Contract, common law, Consumer Protection Act (CPA) and the Constitution.

However, evicting such tenants is not a simple process. There are certain do’s and don’ts dictated by  law that all landlords should be aware of in following the correct procedure and having their tenants removed from the property for good.

“When a tenant does not pay rent on time, although they are in breach of their contract and a landlord has the right to terminate the contract, this does not necessarily mean that the tenant will vacate the property or that the landlord can just put pressure on them to leave,” says Jan Myburgh, General Manager of Harcourts Real Estate South Africa.

The most important thing for landlords to remember is that they cannot evict a tenant themselves. As much as most landlords would love to personally be involved in evicting their troublesome tenant, this is not the correct route.

When a tenant is in breach of the contract, landlords should first ensure that the tenant is served notice to rectify the breach as stipulated in the lease agreement. If, or when nothing is done to rectify the shortcoming, a landlord can terminate the lease agreement and start the legal process to evict the tenant if they are showing no signs of leaving on their own.

The eviction can only be done by a court order, which may take up to 3 months. Legal fees will have to be paid to the attorney upfront, but these fees should later be reimbursed to the landlord by the tenant, as well as the outstanding rent money.

Although a landlord may feel that they have the right to keep a tenant from entering their property by changing the locks to the property, this is an illegal eviction and the landlord will find themselves in hot water with the law if they try this route. As in

normal circumstances, should any locks on the property be changed, landlords are obliged to supply tenants with the new set of keys.

“As angry as landlords may be towards their tenant and seek to reclaim unpaid rent money, they are not allowed to – under any circumstances – enter the property without notifying the tenant, or take the tenant’s possessions within the property as a means of

compensation for rent money that is in arrears,” says Myburgh.

Landlords in the past have had criminal charges laid against them by tenants. A court order needs to first be obtained before actions relating to the tenant’s possessions can occur.

Rental Risk cover could be utilised in order to protect the owner’s investment.  Having this form of insurance will give a landlord peace of mind knowing that the risk of cost due to damage of property can be minimised as well as rental payments and legal costs covered.

Myburgh says Harcourts Real Estate property management divisions offers such products as part of their management services.

The legal route can be a tedious and costly affair, so landlords should rather do everything in their power to choose the right tenant in the first place. This includes credit checks, getting references and being assured that the prospective tenant is employed and well able to pay.